Shoppers downgraded as independent pharmacies stay afloat

Shoppers downgraded as independent pharmacies stay afloat

Score one for the little guy.

Keith Howlett, analyst with Desjardins Capital Markets, has lowered his rating on Shoppers Drug Mart Corp. to hold from buy and cut his price target to $42 from $45 due to a lack of “industry consolidation” expected in the wake of controversial drug reforms recently introduced in Ontario.

In other words, enough independent pharmacists are keeping their heads above water that it is keeping retail giants like Shoppers from dominating the industry as much as expected.

“Unfortunately, there is no evidence of the exit of independent pharmacists from the marketplace,” he said. “The government of Ontario states it is saving $500-million annually from its drug reforms, with another $100-million of annual savings to come this year. This economic hit has not driven any visible reduction in retail pharmacy capacity, or spurred consolidation to date.”

The expected announcement this week that McKesson Corp. will acquire IDA/Guardian/Medicine Shoppe groups of independent pharmacies will “further slow the already glacial pace of industry consolidation,” he said.

Mr. Howlett has reduced his fourth-quarter earnings estimate for Shoppers, meanwhile, to 82¢ a share from 84¢ on weak holiday sales and a delayed start to the cold and flu season thanks to surprisingly warm weather in some parts of Canada.

He now expects no meaningful consolidation in the industry within the next two years, and no meaningful catalysts for Shoppers shares.

“Recent industry events have created more options for independent pharmacists in Canada and appear likely to further stall industry consolidation,” he said. “It also appears the financial returns to independent pharmacists in Ontario were sufficient to withstand their share of the burden of the $500-million of annual drug savings that the Ontario government states it has achieved. Without industry consolidation, there is little wind in Shoppers’ sails.”

Interestingly, new entrant Target, coming to Canada in 2013, will replace the pharmacies in current Zellers locations with a franchise model.

“Target will provide another option for pharmacists in Canada to ‘run their own practice’ outside of chain pharmacy environments,” he said.

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